Landmark Judgements

TDS payment not allowable as deduction in the absence of contractual liability.

The Income Tax Tribunal (ITAT) has rejected the claim of Marubeni India (a wholly-owned subsidiary of Marubeni Corporation, Japan ) to allow tax paid on behalf of the employees as deduction from its income.

The ITAT held that the tax paid so paid cannot be allowed as deduction since there is no contractual agreement in writing between Marubeni India and Marubeni Corporation, Japan for paying the taxes for the employees, on the salary they receive in Japan . These employees were on the rolls of Marubeni Japan . However, their services were utilized by Marubeni India , its Indian subsidiary. Marubeni India waited for two years before making the tax payment.

The ITAT held that the Japanese company should have deducted the tax in respect of salaries received by the employees outside India from the parent and paid to the Indian government. This was not done for the assessment period 1996-1998 and the Indian company paid the taxes later under an arrangement with the income tax authorities. The deduction was claimed for the assessment years 1997-98 and 1998-99.

The ITAT also clarified that there was no contractual liability on the part of Marubeni India to pay the tax and the taxes paid on the salary was not expended out of necessity or need to support the trade but for commercial expediency of the company’s business.

Source: Business Standard

Onus of proving that debt has become bad does not rest on the assessee

A special bench of the Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that the onus of proving that debt has become bad does not rest on the assessee. The bench, in its order has also clarified that tax deduction on such cases can be claimed in the year in which the amount is written off in the balance sheet.

The bench was set up following a number of conflicting rulings on the issue. Such disputes arise when taxpayers follow the mercantile method of accounting wherein the sales given on credit are also accounted for in the books.

As there were a few cases where deduction in respect of bad debts written off was denied by the assessing officers and since the Government received representations on this matter, the Government effected amendment in the Income Tax Act in the year 1989, to facilitate deduction in the year in which the bad debts were written off. If any bad debt which was written off in the books earlier was recovered subsequently, the same can be taxed under Section 41 of the Income Tax Act. However, even this amendment did not solve the problem since the assessing officers started asking taxpayers to prove that debt being written off was really bad. Their contention was that for categorizing any debt as bad, the assessee is required to prove that the same has become bad. This again led to a spate of litigations and finally the matter was referred to the Special Bench of the Tribunal in view of conflicting decisions.

The decision of the special bench has now put to rest all controversies by ruling that taxpayers need not establish that the debt has become bad.

Long term capital losses can be set off against short term capital gains (A.Y. 1988-89 TO 2002-03)

A special bench of the Income Tax Appellate Tribunal in Mumbai has ruled in a long pending income tax case that Foreign Institutional Investors (FIIs) could set off long-term capital losses against short-term capital gains. The ruling will have applicability to all cases until the Financial year ended on 31 st March 2002 (i.e., up to Assessment Year 2002-03), as the Income Tax Act was silent on whether the losses could be set off in such a manner. FIIs are set to benefit considerably by this decision since this would ensure that long-term capital losses are set off against short term capital gains which suffer a higher tax rate of 30%. It is pertinent to note that while short-term capital gains were taxable at a higher rate of 30%, long term gains were taxed at 10%. The Income Tax department argued that this was not permissible and that FIIs should have set off the losses only against long term gains. The net effect of this decision is that the tax department stands to lose 20% in revenues, which runs into several millions of rupees.

Details of expenses not necessary unless allowances are unreasonable/ Disproportinate

The Income-Tax Tribunal, Mumbai (ITAT) has held in the case of an employee with the Shipping Corporation of India that if a salaried employee spends his allowance during the course of his duty, the I-T department is bound to accept the contention of the tax payer that he had spent the allowance in full, even if the claim is not backed by the necessary evidence. The allowance thus claimed should appear reasonable and should be in proportion to the salary.

In this case, the employee with the Shipping Corporation of India had claimed exemption for uniform making allowance and uniform washing allowance amounting to Rs 51,554. The tax authorities declined to exempt the allowance from taxation on the ground that the evidence produced to prove that he had actually spent the amount, was insufficient. Section 10 (14) (I) of the Income-Tax Act provides for allowances for the purpose of meeting expenses incurred for official duties, but the exemption is available only to the extent to which such expenses are actually incurred. The assessing officer disallowed the exemption only on the ground that there were insufficient proofs that the tax payer has actually spent the allowance.

The ITAT order says that the tax authorities cannot insist on details of expenses actually incurred unless the specific allowances are disproportionately high compared to the salary received by him or is unreasonable with reference to the nature of duties performed by the taxpayer. The ITAT, in its order, had also quoted from CBDT circular dated April 1 1955 that “Special allowance or benefit being reasonable and not disproportionately high — No details of expenses actually incurred need be asked for the purpose of granting exemption under section 4 (3) of 1922 Act”, in support of its decision.

Consultancy services of non-technical nature are not taxable

The Income Tax Appellate Tribunal (ITAT) has held in the case of Mckinsey & Co. Inc. that consultancy services of non-technical nature will not be subject to tax in terms of India – USA Double Taxation Avoidance Agreement.

Mckinsey & Co.Inc. ( Philippines ) (MCIP) did not have a Permanent Establishment (PE) in India . The Indian branch office of Mckinsey & Co. Inc. is engaged in the business of providing strategic consultancy services to its clients in India and it received certain geographical specific data and information inputs from MCIP for a consideration. MCIP argued that Article 12(4) of the India – USA Double Taxation Avoidance Agreement (DTAA) is not attracted since services are of a non-technical nature.

The Income Tax Appellate Tribunal (ITAT) held that geographical specific data and information inputs supplied by MCIP were in the nature of commercial and industrial information and such services are of non-technical nature. It therefore held that the consideration received for the supply of such information could not be treated as “fees for included services” under Article 12(4) of the DTAA.

Source: Economic Times